FASB to weigh conflicting accounting rules for companies emerging from bankruptcy

By Rebecca Melvin

New York, Feb. 12 - How is a company emerging from Chapter 11 supposed to carry out its financial reporting when one accounting standard contradicts another?

That is the question being taken up by the directors of the Financial Accounting Standards Board on Wednesday, specifically as it pertains to FASB's Summary of Statement No. 141 (revised) on business combinations and the American Institute of Certified Public Accountants' statement of position paper, 90-7.

SOP 90-7 is a longstanding guide for companies emerging from bankruptcy that requires them to "early adopt" changes in accounting principles that are expected to be implemented within the next 12 months.

But revised Standard 141, issued last September, precludes early adoption of new accounting principles by companies emerging from Chapter 11 bankruptcy.

The new Standard 141 replaces the old 141, and its objective, according to the FASB website, is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination.

Meanwhile, SOP 90-7, subtitled "Financial reporting by entities in reorganization under the bankruptcy code," provides guidance for companies in Chapter 11 or emerging from Chapter 11 with confirmed plans by eliminating potential inconsistencies in reporting.

For example, it requires that professional fees and similar costs be expensed as incurred. These costs should be reported under the reorganization items caption in the statement of income. Prior to SOP 90-7, some entities capitalized these costs and deferred expensing items until the plan was confirmed. Then they were applied to reduce the gain on debt adjustments. Others accrued these costs at the filing date, while still others expensed these costs as incurred.

Unwinding changes could be difficult

As it stands, SOP 90-7 is a lower level of standard than Standard 141, so Standard 141 trumps SOP 90-7 as the more authoritative standard with regard to precluding early adoption.

The problem is that companies ready to emerge may have already implemented the upcoming changes in accounting rules, and it could be difficult to unwind them and even cause financial harm.

According to a FASB source, when the directors meet on Wednesday, they will consider three possible scenarios: leave SOP 90-7 as the appropriate standard; compromise, by having companies adopt any new rules, except those specifically excluded; or strike that portion of SOP 90-7 so that no one is required to early adopt.

"The board will be very considerate of companies that early adopted all these standards," the source said.

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